United Kingdom GDP Q4 2015

United Kingdom

Economy accelerates modestly in Q4; uncertainty mounts over consequences of EU referendum

Weak global economic growth was a drag on the British economy last year. A more complete set of data released by the Office for National Statistics (ONS) on 25 February confirms that the economy expanded 0.5% in the final quarter of the year. The print represented a slight acceleration over the third quarter’s 0.4% growth, which marked the second-lowest increase in nearly three years. Growth for last year as a whole was left unchanged at 2.2%, which marked a significant slowdown over 2014’s 2.9% expansion. Private consumption sustained growth in the fourth quarter last year, thus offsetting a drag from the external sector. In annual terms, GDP grew 1.9% in the fourth quarter, which was also in line with the ONS’s initial estimate. The figure marked a deceleration over the 2.1% increase in the third quarter.

In the fourth quarter, private consumption grew 0.7% on a sequential basis as it was broadly supported by low inflation and record-low interest rates. The figure matched the previous quarter’s increase. Growth in government consumption slowed slightly from 0.6% in Q3 to 0.5% in Q4. This relatively-strong figure comes in spite of a backdrop of increased fiscal tightening. Fixed investment contracted 0.1% in the fourth quarter, thus mirroring the third quarter’s figure.

On the external side of the economy, weak global demand weighed on exports, which contracted 0.1% over the previous quarter in seasonally-adjusted terms in Q4. Nevertheless, the contraction was softer compared to the 0.5% decrease seen in the previous quarter. Imports were also weak and grew 1.2% in Q4 (Q3: +2.7% quarter-on-quarter). As a result, the external sector shaved 0.4 percentage points off of overall economic growth, which was an improvement over the 1.0 percentage points drag seen in the previous quarter.

The UK set 23 June as the date for a referendum on its European Union membership following successful talks between Prime Minister David Cameron and EU leaders. Cameron had to make concessions to secure a deal that gives the UK a special status within the Union in key areas such as immigration, sovereignty, economic governance and competitiveness. Important points of the EU agreement include less political integration with the EU and a cut on migrants’ in-work benefits. The EU agreement is contingent on the UK remaining in the Union. If the UK votes to leave the EU instead, there will be a period of two years during which new arrangements can be negotiated. The referendum represents a political challenge for Cameron. The exit campaign is attracting support from politicians across the political spectrum, including the governing Conservative Party. This has aroused fears of a possible crisis within the Tories as Cameron has continuously emphasized that he will campaign for the UK to remain in the bloc once he manages to renegotiate the country’s membership terms.

Looking forward, there are concerns about the British economy losing momentum in the run up to the EU membership referendum and also about the consequences of a possible Brexit. James Knightley, Senior Economist at ING comments:

“The uncertainty that the vote may generate is likely to result in a loss of momentum in the UK economy, possibly paring around a quarter of a percent off 2016F growth, relative to what might have been the scenario if there was no referendum. Ahead of the referendum, UK and foreign businesses are likely to take a ‘wait-and-see’ approach to hiring and investment, while consumer spending and confidence could weaken modestly. The Bank of England is likely to ‘sit on its hands’ and sterling is likely to continue softening in the build-up to the vote.”

A recovery in investment and in the external sector looks uncertain given the recent Brexit-related depreciation of the pound and a deterioration of business confidence indicators. Moreover, there are doubts about whether the expansion in consumer spending can fuel growth for much longer.

The Bank of England projects that the economy will grow 2.5% in 2016 and 2.6% in 2017. FocusEconomics Consensus Forecast panelists expect the economy to grow 2.2% in 2016, which is unchanged from the previous month’s estimate. The panel sees GDP expanding 2.2% in 2017, also unchanged from last month’s forecast.

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United Kingdom GDP Chart

United Kingdom GDP Q4 2015 1

Note: Quarter-on-quarter changes of seasonally adjusted GDP and year-on-year variation in %.
Source: Office for National Statistics (ONS) and FocusEconomics Consensus Forecast.

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